Calculating and paying tax after a partner dies

When someone dies, their estate will normally have to pay any tax due before any money is distributed to their heirs. Usually when you inherit something there is no tax to pay immediately but you might have to pay tax later on. Here's how the system works.

Working out Income Tax up to the date of death

There is a chance that the person who has died will have paid too much or too little tax and HM Revenue & Customs will have to make an adjustment to their Income Tax calculation. This could result in the estate owing tax or receiving a tax rebate.

To deal with tax and benefits you can use the Tell Us Once service. It is a service that lets you report a death to most government organisations in one go. Then HM Revenue and Customs (HMRC) and the Department for Work and Pensions (DWP) should contact you about the deceased's tax, benefits and entitlements automatically.

Tell US Once service isn't available in Northern Ireland, for more information on organisations to contact go to the GOV.UK website.

If you do need to speak to someone about tax issues, you can find contact details on the GOV.UK website or could call the Deceased Estate Helpline on 0300 123 1072.

Completing a tax return for someone who has died

If the person who has died normally, completed a self-assessment tax return, or their tax affairs in the year of death were at all complex, you may need to complete one for the period from April 6th to the date they died.

Tax on income received by the estate

After someone dies, their estate might continue to receive income from rent, savings or investments. The estate must pay Income Tax on this income.

Interest from UK savings accounts and dividends from UK shareholdings should normally have the tax deducted at source. This means there is no further tax due on that income. But it's best to check with the provider since not all savings products have tax deducted at source, for example some NS&I products.

Rental income, profits from a business, income from overseas, and income from foreign share holdings won't have UK tax automatically deducted. In this case the personal representatives may have to complete a tax return.

Tell HM Revenue & Customs about any untaxed or foreign income by calling their Deceased Estate Helpline on 0300 123 1072. If you need information on valuing shares or other assets, contact the Shares and Assets Valuation Helpline on 0300 123 1082.

When is Capital Gains Tax due?

The good news is that the estate doesn't have to pay any Capital Gains Tax on 'unrealised gains' (meaning where the asset was not sold) before the deceased died.

The estate only has to pay Capital Gains Tax if the personal representatives sell an asset and its value has risen between the date of death and the date when the asset is sold. But the personal representatives do have a tax-free allowance (£11,100 in the tax year 2015/16) for the tax year of death and the following two tax years and so not all gains will create a tax bill.

An example

John bought a holiday cottage for £100,000 on 1 February 2001.

He dies on 7 January 2015 when the home is worth £170,000. No Capital Gains Tax is due on the £70,000 increase in value up to the date of death.

The estate sells the cottage on 1 May 2015 for £190,000. The first £11,100 of the £20,000 gain is tax free, but Capital Gains Tax is due on the remaining gain of £8,900.

When do you have to pay Inheritance Tax?

Only a small number of estates have to pay Inheritance Tax. Currently the Inheritance Tax threshold is £325,000 so broadly speaking, only estates worth more than that are liable to pay the tax. If you are married or in a civil partnership, your estate can be worth up to £650,000 before Inheritance Tax is payable.

However, all personal representatives still need to fill out an Inheritance Tax form when they apply for a grant of representation. This is to establish the value of the estate so that HM Revenue & Customs can decide whether Inheritance Tax is due.

If you need help working out which form you need, or want an explanation of the forms, you can contact HM Revenue & Customs' Probate and Inheritance Tax Helpline on 0300 123 1072. There's more information about contact details on the GOV.UK website. If you need help filling in the forms you may be able to get help from a family member, a solicitor or accountant (but you will have to pay), or, if you're on a low income, there are charities and organisations that may be able to help you. There is information on these on the GOV.UK website.

Once you've filled out the forms, it should be clear whether Inheritance Tax is payable on the estate.

Changes to Inheritance Tax

From 2017, a £175,000 allowance will be phased in that means you can leave your home to children and grandchildren tax-free when you die. This is per person and can be transferred to your partner when you die.

This means when added to the existing £325,000 individual allowance, a couple will be able to leave £1 million without paying inheritance tax by 2020.

You've received an inheritance - is there any tax to pay?

If you're an heir, there's not normally any tax to pay at the point when you inherit. Once you have inherited, then the cash, investments or other property are yours and you will be liable for tax on any income or gains from them in the normal way.

Tax on income produced by an inherited asset

If the asset you inherit produces an income, for example rental income on a property, you will be responsible for paying tax on that income.

If you've inherited cash and put it in a savings account, for example, tax on the interest will normally be automatically deducted at source before you get it so you won't have to do anything.

Capital Gains Tax on inherited assets

If you're an heir and you inherit any assets from the estate, you may be liable for Capital Gains Tax if you go on to sell these assets. But you'll only pay tax on the increase in value between the date of the deceased's death and the date when you sell the asset. Everyone has an annual tax-free allowance (£11,100 in the tax year 2015/16), so as long as your gains are worth less than this, then there's no tax to pay.

If you inherited a home and moved into it as your own home, or if it was already your joint home, you don't normally have to pay Capital Gains Tax when you sell it.

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